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Banking and Finance

The banking and financial markets in the Arab Region are one of the fastest growing worldwide. More than 330 Arab banking and financial institutions operate in the Arab region today, with total banking assets amounting to 140 percent of GDP, or USD 3.4 trillion, total deposits accounting for more than USD 2.2 trillion and total loans reaching USD 1.9 trillion by the end of 2016.[1]

Financial inclusion[*] has witnessed a notable progress in the region, focusing mostly on microcredit and, more specifically on microcredit to individual entrepreneurs.[2] Financial inclusion is still hindered though by the deficiencies in the financial infrastructure and regulatory frameworks that increase the costs and risks associated to increasing access to finance. The Arab region lags several regions on the key indicators of account ownership and access to credit from formal financial institutions, where nearly 70 percent of adults (168 million) report no account ownership.[2] Account ownership for persons aged 15 years and over is quite high in the GCC countries averaging 74 percent, reaching 84 percent in the United Arab Emirates and 82 percent in Bahrain in 2014; while in Yemen, only 6 percent of adults (age 15 and above) reported having an account in 2014. Borrowings from formal financial institutions is also low in the region at only 6 percent, with 44 percent of adults (age 15 and above) reporting having a loan account in 2014.[3]

ATM networks are the most developed in the GCC countries ranging between 56 ATMs in Kuwait and 76 ATMs in Saudi Arabia per 100,000 adults, compared to less than two ATMs per 100,000 adults in Iraq in 2015. In terms of bank branches per population, Lebanon and Morocco scored the highest in the region with 24 bank branches per 100,000 population in 2015, whereas both Yemen and Comoros scored the lowest with less than 3 bank branches per 100,000 population.[4]

In the last two decades, the market for microfinance in the Arab region has grown strongly, although it still suffers from limitations due to the inadequate regulations and undeveloped structures. Microcredit accounts for just 0.2% of the region’s GDP and lending by microfinance institutions currently reach only 1.8% of the adult population.[5]

When assessing financial depth[**], major discrepancies appear across Arab countries.[6] The bank deposit to GDP ratio was the highest in Lebanon at 247%, followed by Jordan at 96%, and the lowest in Sudan at 10% in 2015. In 2015, the private sector credit to GDP ratio,[***] which is also a reference of the role of the private sector in the national economy, ranged between 9 percent in Iraq, Sudan and Palestine and 107 percent in Lebanon.[4]

As the financial industry expanded and diversified, many other non-banking financial institutions and services emerged in the region. However, the non-bank financial sector —comprising the stock market, corporate bond market, insurance companies, pension funds, mutual funds, etc. — remains limited, part of which is related to the lack of enabling legislation.[7] On average, insurance companies and mutual funds account for less than 5 percent and private pension funds are negligible.[8] On the other hand, equity markets are large in some Arab countries as measured by the ratio of market capitalization to GDP. By the end of December 2017, the market capitalization of Arab financial markets reached USD 1,137.7 billion, knowing that Saudi Arabia was topping the Arab financial markets with a market capitalization at USD 451 billion, followed by Qatar at USD 130 billion. By the end of 2017, there were 1,529 listed companies on the Arab stock markets.[9]

Islamic finance [****] has grown rapidly over the past decade with around 50 percent of the Islamic financial institutions being located in the Arab region.[10] Islamic banking, funded by non-interest bearing current accounts, has become systematically important particularly in the GCC.[11] The largest Islamic banking system by assets in the GCC region is in Saudi Arabia where Islamic finance assets represent more than 50 percent of the financing.[12]

This overview has been drafted by the ADP team based on most available data as of 27 February 2018.

[*] Financial inclusion refers to the access of individuals and businesses to useful and affordable financial products and services

[**] Financial depth captures the financial sector relative to the economy or the size of banks, other financial institutions, and financial markets in a country, taken together and compared to a measure of economic output

[***] Defined as domestic private credit to the real sector by deposit money banks as percentage of local currency GDP, according to the World Bank

[****] Islamic finance refers to the provision of financial services in accordance with Islamic jurisprudence (Shari’ah)

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